BFC v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Lai Siu Chiu J
• Judgment Date: 09 September 2013
• Neutral Citation: [2013] SGHC 169
• Court: High Court (Singapore)
• Docket Number: Income Tax Appeal No 2 of 2013
• Year: 2013
• Published date: 13 September 2013
• Hearing Date: 08 July 2013
• Plaintiff Counsel: Mr Tan Kay Kheng, Ms Novella Chan, Mr Tan Shao Tong and Mr Jeremiah Soh (WongPartnership LLP)
• Defendant Counsel: Ms Quek Hui Ling, Mr Jimmy Goh and Ms Michelle Chee (Inland Revenue Authority of Singapore)
• Subject Matter: Revenue Law,Income Taxation,Deduction
• Citation: [2013] SGHC 169

Lai Siu Chiu J: Introduction

This is an appeal by a taxpayer (“the Appellant”) against the decision of the Income Tax Board of Review (“the ITBR”) in Income Tax Appeals Nos 6 and 7 of 2011. The ITBR upheld the decision of the Comptroller of Income Tax (“the Comptroller”) that certain borrowing expenses incurred by the Appellant in respect of two bond issues were not deductible for the purposes of assessing income tax. Dissatisfied with the decision of the ITBR, the Appellant appealed to the High Court vide this Income Tax Appeal No 2 of 2013 (“TA 2/2013”).

Background

The Appellant carries on the business of hospitality, investment holding and property investment. The Appellant also owns and operates a hotel (“the Hotel”). In 1995 and 1996, the Appellant issued bonds (subsequently referred to as “the 1995 Bonds” and “the 1996 Bonds” respectively). Each bond issue was for a five year term with the 1995 Bonds maturing in 2000 and the 1996 Bonds maturing in 2001.

The 1995 Bonds

The 1995 Bonds were secured bonds with a principal amount of $150,000,000. Interest was payable semi-annually in arrears on the principal amount at 5.625% per annum. In addition to interest, the Appellant also offered a discount and redemption premium to purchasers. The issue price of the 1995 Bonds was set at 99.5695% of the principal amount. This provided a discount of 0.4305% or $645,750 on the principal amount. The redemption premium, which was payable upon maturity and set at 1.5% of the principal amount, amounted to $2,250,000.

It was the Appellant’s case that the proceeds of the 1995 Bonds were used for three purposes: (a) the financing of the renovation of the Hotel; (b) the refinancing of the existing borrowings of both the Appellant and its subsidiaries; and (c) as working capital for the day-to-day operations of the Appellant’s business.

The 1996 Bonds

The 1996 Bonds were unsecured bonds with a principal amount of $165,000,000. Interest was payable annually in arrears on the principal amount at 5.75% per annum. As with the 1995 Bonds, the Appellant offered a discount on the 1996 Bonds. The issue price of the 1996 Bonds was thus set at 92.9197% of the principal amount, giving a discount of 7.0803% or $11,682,495. The Appellant did not offer a redemption premium for the 1996 Bonds.

It was the Appellant’s case that the proceeds of the 1996 Bonds were used as working capital to finance the day-to-day operations of the Appellant’s business.

The Disputed Tax Treatment

In assessing the Appellant’s income that was chargeable with tax, the Comptroller allowed the deduction of interest paid on the 1995 Bonds and the 1996 Bonds. With regard to the 1995 Bonds, the Appellant was able to identify (and the Comptroller accepted) that part of the net proceeds, in the sum of $36,564,000, was used to finance the renovation of the Hotel. The Comptroller allowed a proportionate deduction for the interest paid on the 1995 Bonds. The Appellant sought a similar deduction relating to the discount and redemption premium incurred in respect of the 1995 Bonds.

As for the balance of the proceeds of the 1995 Bonds and the 1996 Bonds, the Comptroller regarded this as forming a mixed pool of funds. Here, the Comptroller applied an interest adjustment method known as the Total Assets Method (“the TAM”). Applying the TAM, the Comptroller only allowed a deduction for interest expenses attributable to income-producing assets. The Appellant thus sought similar deductions based on the TAM for the discounts and redemption premium paid on the 1995 Bonds and the 1996 Bonds.

Based on [7] and [8] above, the sums claimed by the Appellant as deductibles were as follows: $2,439,598 for Year of Assessment 2001 in relation to the discount and redemption incurred in respect of the 1995 Bonds; and $8,731,692 for Year of Assessment 2002 in relation to the discount incurred in respect of the 1996 Bonds.

The Comptroller disallowed the Appellant’s claims for the above deductions on two grounds. First, the Comptroller found that the discounts and redemption premium were not “interest” and therefore not deductible under s 14(1)(a) of the Income Tax Act (Cap 134, 2001 Rev Ed)(“the ITA”). Second, the Comptroller found that the discounts and redemption premium were not outgoings and expenses wholly and exclusively incurred in the production of the Appellant’s income chargeable with tax and therefore not deductible under s 14(1) of the ITA.

Dissatisfied with the Comptroller’s disallowance of its claims, the Appellant appealed to the ITBR.

The Decision of the ITBR

The appeal was heard by the ITBR on 25 July 2012. The ITBR dismissed the appeal in its grounds of decision (“the GD”) dated 14 December 2012. The ITBR held that the discounts and the redemption premium were not deductible for three primary reasons. (Henceforth the reference to paragraphs in the GD of the ITBR will be in parentheses.)

First, the discounts were not deductible under s 14(1) of the ITA as they only related to the non-receipt of the amount of the discounts (at [17]–[18]). Therefore, they were not “outgoings or expenses” incurred by the Appellant.

Second, the discounts and redemption premium were not deductible under s 14(1) of the ITA because part of the bond proceeds formed a mixed pool of funds, some of which were not used for income producing purposes. Accordingly, the discount and redemption premium were not wholly and exclusively incurred in the production of the income (at [24]).

Third, the discounts and redemption premium were not “interest” within the meaning of the term under s 14(1)(a) of the ITA and therefore did not rank for deduction under that provision. This was so as the discounts and redemption premiums were one-off payments while interest remained payable as long as the bonds remained unredeemed (at [27]). Furthermore, s 10(1)(d) of the ITA referred distinctly to “interest” and “discount”, thereby importing a difference between the two, even if they were both examples of borrowing costs (at [28]). In this regard, the 2008 amendments to the ITA which specifically provided for the deduction of discounts and redemption premiums also suggested that such borrowing costs were not interest (at [29]).

The Appellant appealed to the High Court against the whole of the ITBR’s decision.

The Scheme Relating to the Deduction of Expenditure under the ITA

Income chargeable with income tax is arrived at after taking into account the various deductions allowed under the ITA. In this regard, s 14 prescribes a positive test of deductibility and provides for what is deductible. In these proceedings, the Appellant claims that the sums paid as discounts and redemption premium were deductible under ss 14(1) or 14(1)(a) of the ITA. The relevant provisions read:

14.—(1) For the purpose of ascertaining the income of any person for any period from any source chargeable with tax under this Act (referred to in this Part as the income), there shall be deducted all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of the income, including (a) except as provided in this section – (i) any sum payable by way of interest;… (ii) … upon any money borrowed by that person where the Comptroller is satisfied that such sum is payable on capital employed in acquiring the income; …

I should add that it is common ground between the parties that the Appellant only needs to succeed on either s 14(1) or s 14(1)(a). The Comptroller accepts that the requirements for deductibility under s 14(1) and under the subparagraphs of s 14(1) are separate and independent.

On the other hand, s 15 of the ITA prescribes a negative test of deductibility. It provides for what is not deductible notwithstanding the fact that the expenditure satisfies the positive test of deductibility under s 14. In these proceedings, s 15(1)(c) is pertinent. It reads:

15.—(1) Notwithstanding the provisions of this Act, for the purpose of ascertaining the income of any person, no deduction shall be allowed in respect of – … (c) any capital withdrawn or any sum employed or intended to be employed as capital except as provided in s 14(1)(h); …

The effect of s 15(1)(c) is that an expense will not rank for deduction if the expense is capital as opposed to revenue in nature.

Based on the foregoing statutory provisions, the issues in this appeal are as follows: Whether the discounts and redemption premium were “interest” under s 14(1)(a) of the ITA. Whether the discounts and redemption premium were outgoings and expenses wholly and exclusively incurred in the production of the Appellant’s income under s 14(1) of the ITA. Whether the discounts and redemption premium were capital as opposed to revenue expenses and therefore prohibited from deduction under s 15(1)(c) of the ITA.

Were the discounts and redemption premium “interest” under s 14(1)(a) of the ITA?

Section 14(1)(a) of the ITA grants a deduction to sums payable as “interest” upon money borrowed by the taxpayer. The term “interest” however is not defined by the ITA. Rather, its meaning falls to be determined as a matter of statutory interpretation. Surprisingly, there has been little local authority interpreting the term. In this regard, the leading local authority is Chng Gim Huat v Public Prosecutor [2000] 2 SLR(R) 360 (“Chng Gim Huat”).

The facts in Chng Gim Huat are straightforward. The taxpayer had extended a loan to a friend. The taxpayer later sought repayment of the loan and received several sums of money from the borrower. The taxpayer then argued that the repayments were capital in nature as opposed to interest income. The issue then was whether these sums were interest income and whether the taxpayer had wilfully omitted them from his income tax returns with the intention to evade tax. In discussing the meaning of “interest”, Yong Pung How CJ...